Disputes on director’s actual duties, knowledge of broker’s license requirement force remand
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Wednesday, July 26, 2017

Disputes on director’s actual duties, knowledge of broker’s license requirement force remand

By Joy P. Waltemath, J.D.

Vacating and remanding summary judgment for a resort management company, the First Circuit found too many disputed facts as to whether a marketing and sales director’s breach of contract claims were viable, including whether his contract was void because it required him to work as a real estate broker without a Puerto Rico license, whether his employer was aware, or should have been, when the contract was signed that a license would be required, and whether all or just some of the director’s contractual duties actually required a license (Farthing v. Coco Beach Resort Management, LLC, July 21, 2017, Lynch, S.).

Hired without a license. Coco Beach hired the employee for a one-year contract as its marketing and sales director in Puerto Rico, which the director claimed was breached when Coco Beach unilaterally terminated the contract after just over three months. He sued to recover unpaid base salary and anticipated commissions on real estate sales that he said were imminent when Coco Beach fired him. It was undisputed that the director lacked a Puerto Rico real estate broker’s license; to work as a broker without a license is a misdemeanor under PR law. However, the director averred that Coco Beach’s president knew when he hired him that he was not licensed in Puerto Rico and that the president specifically told him that under Puerto Rico law, he did not need a real estate license, because he would be an employee of Coco Beach, selling its own property. Coco Beach, a Puerto Rico company, claimed that it did not know when it signed the contract that the director lacked a real estate license or that a license was required.

Fired. In vacating a magistrate’s grant of summary judgment to Coco Beach, the appeals court first pointed to the parties’ disagreement over the circumstances of the director’s termination. Claiming Coco Beach unilaterally terminated the agreement, the director said its president told him that he “had done an amazing job and accomplished more than [Coco Beach] had ever hoped for,” but that Coco Beach was “letting [him] go because [Coco Beach] had decided not to sell real estate and to start selling timeshares [at Las Casas] instead.” Coco Beach admitted that its president made these statements.

The director also alleged that he was offered two weeks’ severance pay in exchange for agreeing not to pursue any claims against Coco Beach, but he did not accept the offer. Coco Beach claimed he did accept the offer, that it gave him a check for $6750 for “services rendered up to that date,” and that although the director agreed to return to Coco Beach’s offices a few weeks later to collect the agreed severance, he never returned. At the time, neither party suggested that lack of a broker’s license was the reason for terminating the agreement nor that it was stated as the reason; Coco Beach first alleged that the contract was illegal after the fact, in its answer to the director’s complaint.

Validity of contract. The magistrate had found the employment contract was null and void because it provided on its face that the director would perform the duties of a real estate broker but he lacked the necessary license, reasoning that under title 31, section 3372 of the Laws of Puerto Rico, the parties could set the clauses and conditions of a contract “provided they are not in contravention of law, morals, or public order.” But the appeals court found important disputes of fact as to liability that were material to whether or not the director could seek relief “despite the fact that his employment agreement, in whole or in part, may have violated Puerto Rico’s public policy.”

Excusable ignorance. To the appeals court, one important disputed fact was whether Coco Beach was aware, or should have been aware, at the employment agreement’s signing that the soon-to-be director did not have a Puerto Rico license and that one would be required. If the director, who was from South Carolina, was “excusably ignorant” of the fact that his employment agreement may have violated Puerto Rico’s public policy—and if Coco Beach was not excusably ignorant—then the director could have a claim for breach, even with an alleged public policy violation. The First Circuit said that the exception for excusable ignorance did not undercut, but rather reinforced, the rule’s deterrence aims, but in any event the issue required additional fact-finding as to both parties’ knowledge, or excusable lack of knowledge, when they entered the agreement.

Multiple job duties. Another disputed material fact is whether at least some of director’s job responsibilities could have been performed without a broker’s license. The agreement had a severability clause, which conceivably could allow enforcement of the agreement’s base salary clause, even if the clauses regarding sales commissions were illegal and void. If the director could demonstrate that some of his duties did not require a license, the court also would consider whether the agreement is divisible, citing case law that even in the absence of a severability clause, “[c]ivil law accepts that ‘in some cases partial nullity may be used as a means to guarantee the continuity of a business whose fundamental content is not affected by the void portion.’”

Specifically, the director argued that at least part of his job was infrastructure development to support marketing his employer’s property and also that his sales activities were undertaken as the employee of a real estate seller (Coco Beach), not as an intermediary between a seller and buyer, which would bring him under Puerto Rico’s license requirement. Coco Beach responded that the director’s employment duties were “intermingled and interdependent,” and the agreement did not say that his base salary did not include “compensation for his real estate brokering duties.” But the appeals court saw this as more disputed issues of fact, “material to both severability and divisibility.” It would require further fact-finding to determine whether at least some of the director’s job duties could be performed without a license, and/or whether the employment agreement could be severable or divisible. As such, the First Circuit left those questions for the district court to answer on remand “with the benefit of a more complete factual and legal record.”

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